Historically, that’s been followed by inflation. “Intuitively it makes sense that during recessionary periods supply tightening will occur when producers overestimate demand declines, and that the resulting imbalance can create inflationary pressure (particularly if combined with low rates),” Research Edge says.

Here’s that ratio against the Producer Price Index:

In sum, Research Edge says “The reality is that the decline in home values, low interest rates, government incentives and the increase in household formations will create real demand for housing units. As a result, there is a disconnect between the perceived demand that people are not buying houses right now and the real demand, creating a “real” decline in housing supply. At some point this will lead to future issues – inflation.“

It’s certainly worth pondering this claim, that builder pessimism has caused them to undershoot. On the other hand, most analysts think the decline has legs, and that housing prices as measured by the Case-Shiller Index will resume their decline near year’s end.